Treasure Chest: Fed Tapering And Oz Banks

This story features NATIONAL AUSTRALIA BANK LIMITED. For more info SHARE ANALYSIS: NAB

By Greg Peel

Tonight the world will, hopefully, learn once and for all whether or not the US Federal Reserve is planning to begin tapering its bond purchases anytime soon, signally the first wind-back of the central bank’s quantitative easing program.

If the Fed does not announce imminent tapering, it is assumed tapering would nevertheless not be that far off. In anticipation we have already seen an increase in the US dollar and US bond yields. QE involves the Fed purchasing, among other assets, US Treasuries and specifically, in the case of QE3, ten-year bonds. The bonds are purchased with freshly “printed” US dollars, the result of which both lowers bond yields and devalues the US dollar.

Not only has anticipation seen the US dollar rise and US bond yields rise, it has helped to send the Aussie tumbling as the interest rate differential to Aussie interest rates closes. Further falls in the Aussie are now expected ahead as the Fed moves from winding back QE to specifically raising its cash rate from the zero level established soon after the GFC. A rise in the funds rate would push up US short term yields and further close the interest rate differential.

In light of hastily revised currency forecasts, stock analysts have been busy this past fortnight adjusting earnings forecasts for those stocks in various sectors which will benefit/suffer from a lower Aussie dollar exchange rate. Resource stocks have featured heavily in forecast changes, as have other exporters, importers, and companies with large offshore revenue bases. Australia’s banks have not featured to date given operations are mostly domestic and thus unaffected by movements in exchange rates.

ANZ Bank ((ANZ)) is nevertheless an exception. National Bank ((NAB)) has its UK business but this is being wound down, while ANZ is in the process of building an Asian revenue base. Outside of New Zealand exposures, the other banks remain largely parochial.

ANZ should stand to benefit from QE tapering relative to banking peers, suggests CIMB, from higher spreads on its institutional lending, Treasury earnings on its US dollar capital base in Asia and from the translation of US dollar earnings into Aussie dollars.

Later down the track when the Fed raises its cash rate, which CIMB suggests is unlikely before 2016, short term rates such as Libor (London interbank offered rate) will rise and a higher Libor rate would lift deposit spreads in ANZ’s transaction banking and retail CASA accounts (current account, savings account). ANZ has also built up US$26bn of excess central bank reserves.

CIMB has slightly upgraded its FY14-15 earnings forecasts for ANZ, lifted its 12-month share price target to $26.93 from $25.84 and upgraded its rating to Outperform from Neutral. ANZ is CIMB’s top pick among the Big Four.
 

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